Most people don’t pay attention to the unusual happenings in global currencies markets.
The Taiwan dollar has risen more than 5% on a single-day basis, its largest jump since 1988.
Likewise, Asian exporters and sovereign funds, as well as banks in Asia, are trying more to avoid the US dollar when conducting their business.
The US dollar’s confidence is declining and the capital has moved.
Was once a small drift, but now it is becoming something bigger. The US is not ready for a major paradigm shift in Asia.
Does the US Dollar still anchor the global economy?
The dollar is the foundation of global finance for decades.
A seminal paper from 2021 states that it is used for 88% of currency transactions.
The greenback accounts for over half of the global reserves of foreign currency.
This grip has begun to relax. The dollar index has fallen by nearly 8% so far in this year. This is the biggest decline year-to date of its 20 year history.
Most Asian currencies have also strengthened against the US dollar.
The Taiwan dollar stood out, rising 5% within a day as exporters sold their dollars.
The offshore yuan reached a 6-month high.
Hong Kong’s dollar reached the top of its trading range, prompting a 6 billion-dollar intervention from its de facto Central Bank.
These moves are not isolated.
These are just a few examples of an overall trend. Asian institutions, ranging from insurance funds to central banks, repatriate dollar denominated assets in order to hedge their exposure.
The demand for dollar hedges is on the rise. To cope with this flood, some firms have even placed restrictions on their trading platforms.
Stephen Jen, an economist who worked for the IMF and is known as “dollar-smile” Stephen Jen estimated this week that Asian institutional investors and exporters hold unhedged positions in dollars of up to $2,5 trillion.
Even if only a small fraction of this movement occurs, the impact on the US dollar could be significant and change the way global finance functions.
What is driving currency fluctuation?
It is President Trump’s agenda for economic growth that has triggered the immediate response.
He has escalated tariff threats since returning to the office and forced trade negotiations into a deadlock.
US tariffs are currently at 145% on Chinese products, and there is little sign of any near-term reduction.
Beijing, in return, has stated that it will not engage in meaningful discussions until the US cancels what Beijing calls unilateral tariffs.
The pressure on both sides is real.
First contraction in US economic growth since 2022.
China’s Manufacturing Index also fell into contraction.
The two countries face a slower economy, as well as weaker exports and increasing capital tensions.
The difference between the US and Asia is the fact that the US is still relying on the status of the dollar as a global currency, while Asia quietly adjusts its strategy.
Taiwanese, Chinese, and Southeast Asian exporters no longer hold dollars.
The dollar is weakening further, so they are exchanging it faster in local currency.
Some people are willing to pay higher costs for hedging just so they can get out.
This is not speculation; this is risk management.
It’s matched with action on the institution level.
The demand for currency derivatives, which do not use the dollar at all, is increasing in Asia.
This includes the euro-yuan exchange, rupiah to yuan swaps and Hong Kong dollar direct hedges.
Bloomberg reports that a foreign bank is setting up in Indonesia a dedicated desk for yuan trades to satisfy local demand.
What is the future of dollarization?
Technically, yes. Technically, yes. But not as people imagine.
There is no alternative that can replace the dollar in terms of liquidity, depth or reach.
In fact, the euro’s global share of transactions has declined in recent years.
SWIFT’s March data shows that despite the fact that the yuan has gained ground, only 4% of all global payments are made in yuan.
The trend is clear. Last year, China’s Cross-Border Interbank Payment System, its SWIFT alternative, processed $24 trillion worth of transactions, an increase of 40% since 2023.
China is using the yuan in record numbers for its cross-border trading, particularly with Southeast Asia.
Exports from these regions have increased by more than 80% over the past five years, while the US and EU saw a much slower rate of growth.
The dollar is losing its dominance, and not because of a sudden crash, but rather through the slow, deliberate change in how countries and companies transact.
The dollar’s role will diminish if it is no longer the default currency, but rather one option among many.
Over the last year, the cost of hedged dollar also increased. This is especially true around major political events such as the US elections and announcements on trade policies.
Now, traders are pricing more risk into holding dollars and not less.
What are the biggest risks?
Credibility is the greater risk, not volatility.
Trust is the key to the dollar’s international status. This trust is eroding.
The US’s decision to freeze Russia’s dollars after the invasion of Ukraine sent the message that the US could condition access to its dollar-based system on political considerations.
In the years since, many countries have begun to build alternatives.
This perception has been amplified by President Trump’s actions.
Investors are uneasy about his repeated attacks against the Federal Reserve and unpredictable tariff policies, as well as his complaints openly regarding the strength of the dollar.
The US has a persistent budget deficit, which means that its space for monetary easement is less than it was before.
The demand for US Treasuries from abroad has declined.
In recent auctions the number of “indirect buyers” has decreased (which include foreign central banks).
Financing US debt may become expensive if this trend continues. This is especially true if the interest rate falls and investors begin to look elsewhere for stability and return.
It’s not just about the currency markets. This is about global capital flows.
The playing field changes if fewer countries hold dollars as reserve assets or as trade intermediaries.
No one is expecting the dollar to vanish at the end of the year.
In the global financial world, power doesn’t have to disappear to be lost.
It only takes a sufficient number of players to change their minds. Many countries have begun to consider their options.
The post Asia quietly turns its back on US Dollar may be updated as new information becomes available.
